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My Home Loan is Underwater, and So is My House

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There are two ways in which a house can be underwater. In the last few years, it’s become common to call a house underwater when the homeowner owes more on the mortgage than the house is actually worse. And then there’s the old-fashioned definition, where flood or torrential rain leaves the house itself actually under water.

Ed, a Credit.com reader, has the misfortune to suffer both. When Ed bought the house, before the housing market crash, he had the home inspected. The inspector found “that the basement had flooded before but it seemed to be a rare occurrence,” Ed wrote in response to a recent Credit.com story.

Unfortunately, it wasn’t rare at all. The basement floods all the time, Ed says, especially since the city government did major reconstruction of his neighborhood’s street drainage system. The “upgrade” leaves rain water draining right into Ed’s yard, and from there into his house.

That’s causing some serious problems.

“There is mold throughout the house,” Ed writes, including “mushrooms growing in the bathroom.”

Ed and his wife have spent lots of money trying to fix the problem. But because of previous bankruptcies, banks have refused to give them a loan to pay for more expensive repairs. And the financial strain is beginning to show, as “we have struggled to stay in the black” on mortgage payments, Ed says.

Now Ed finds himself in a wrenching position. He can’t afford to maintain the house. He owes $109,000 on it, far more than its worth given its flooding and mold problems, not to mention a post-crash loss of value.

“We have been trying so hard to be good homeowners,” he says. “How can we get out from under this without losing everything?”

When a consumer finds himself in Ed’s position, it can feel like he’s losing everything. But Barry Paperno, Credit.com’s credit scoring expert, has a reminder for Ed. Sure, losing one’s house to foreclosure or short sale is bad. It will hurt Ed’s credit score, and it will probably cost Ed some money. But he should be able to recover.

“The good news is that as soon as that foreclosure hits, his credit report is as bad as it’s going to get,” Paperno says. “And from there it will only improve.”

Paperno, who used to do credit scoring for FICO, says a FICO study found that the impact of a foreclosure varies depending on one’s credit score. For someone who comes into foreclosure with a great credit score of, say, 780, a foreclosure would cost him between 140 to 160 points. But if someone already has fair-to-mediocre credit of, say, 680, a foreclosure causes less damage, lowering their score by 85 to 105 points.

Given Ed’s former bankruptcy, it’s likely that he fits into the second category, which means he has somewhat less to fear. What would be even worse is letting the situation fester, which could result in bankruptcy.

“A foreclosure just might not be as horrible as a bankruptcy,” Paperno says.

If Ed decides he can’t salvage the house, he will have to take into account certain costs. If the house gets a short sale and the bank insists that Ed pay the deficiency (that’s the difference between the value of the value of the mortgage and whatever the house eventually sells for), it could cost Ed some money. In a short sale or a foreclosure, any amount of forgiven debt is treated by the IRS as extra income, and taxed.

This gets complicated quickly, so Ed might want to turn to professional advice.

“It’s a good idea for a homeowners to meet with a bankruptcy attorney if they’re thinking about letting a home go into foreclosure,” says Gerri Detweiler, Credit.com’s consumer credit expert.

None of this is good news. But when put in perspective, “It might not be catastrophic,” Paperno says.

Image: TaxBrackets.org, via Flickr

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  • http://www.home-liberty.com Mark Moore

    Christopher, thank you for writing such a well balanced article. I especially liked your discussion of the effect on FICO scores. Almost every other site reports catastrophic hits to credit score. But, the Federal Reserve, and FICO have reported repeatedly numbers that agree with yours. Both sources have reported no measurable difference in impact to credit score for foreclosure vs. short-sale.

    For your readers in CA and AZ, that do decide strategic default is in their best interest, I would encourage them to look into home-liberty.com. Our program is designed for families like Ed’s. We allow a strategic defaulter to keep their home and to lower the principal to below current appraised value.

    Mark Moore, CEO
    HomeLiberty, Inc.

  • Pingback: My Home Loan is Underwater, and So is – Credit.com News + Advice | Home Loans Tips()

  • Second time I have seen this name, where are you Mark Moore

    Help, Help, help I am drowning. Tried to rectify problem for few years and problem seems to have gone from bad to worse. If there is really a lifeline out there and from what I read about you and your company is true, then how can I become a part of this (solution opposed to a problem) and help others like myself who have explored many options, obviously the wrong one. PLEASE HELP?

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